As the cost of college tuition continues to rise during a time where many households are struggling to make ends meet, students and their families are looking for safe ways to save for college.
Continue Reading Below
To help parents pay for college, many states offer 529 plans, which allow families to buy contracts or units at a set tuition price that will cover future college tuition benefits. These tax-advantaged plans, also known as qualified tuition plans, are sponsored by state governments, and every state offers at least one 529 plan.
These plans had been touted as one of the best ways to save for college, and were created as a way for parents to insure against tuition inflation.
But here’s the problem: The Great Recession left many states with still-widening budget deficits, and now some states are facing shortfalls in their 529 plans. For example, plans in Colorado and Ohio have been closed out to new participants and current members were paid out. Alabama also closed its plan out, and is negotiating the settlement for participants above what they put in, according to the College Savings Plans Network.
But a recently-released survey from CSPN shows that pre-paid tuition plans are currently 93% funded, up from 91% last fiscal year, ending June 30.
This report is based on 19 of 20 prepaid 529 tuition plans that are both open and closed to new enrollments. The survey found 11 prepaid state tuition plans are open for new enrollments, and are all close to being fully funded at a national average of 97%. In total, $22.4 billion has been saved in more than 1.6 million accounts in 20 states, according to CSPN.
Continue Reading Below
Betty Lochner, vice chair of College Savings Plans Network, said the levels of funding on the plans in the survey are at ideal levels. In fact, Lochner said that having plans 100% funded is unnecessary due to the way these savings plans are structured.
"Having a plan 100% funded means that if everyone when to school today and took their money out—including all of the babies—you could pay for everyone," she said. "When you are over 90% funded, you are really well off, because not everyone is going to go to school today. The babies will go in 18 years."
According to Fin Aid Finder, the average cost of a four-year, in-state college degree is $50,000, and these tuition rates have increased, on average, 7.2% annually since 1990. On average, full-time undergrad students borrowed $4,963 in 2010, according to College Board. After adjusting for inflation, students are borrowing twice as much as they did 10 years ago to cover tuition costs.
Lochner says the uptick in tuition funding is due to the climb out of the recession over the past year.
"People have more confidence and are starting to prioritize," Lochner said. "We saw the dip in 2008 and 2009 when the crisis hit and the stock market crashed—investments didn't do as well."
As tuition continues to climb, Lochner said families will likely turn to 529 plans as a way to save long-term for education. Student loans are set to top more than $100 billion in 2012, and there will be more than $1 trillion in outstanding loans, according to the Federal Reserve Bank of New York.
"I think we will see incredible increases in these funds over the next few years with uncertainty about jobs and the economy," Lochner said. "Right now, we are better funded nationally than pension programs."
Each state has its own contract as to how its savings plan is structured, Lochner said, and states know in advance what will happen if there is a budget shortfall. For example, Washington state's contract states it will raise its prices in order to make enough money to cover the shortfall, and if the fund ever runs out, the state will step in and make appropriations to students, she said.
"The secret to success is having (tuition) priced accurately and estimating how much money you will need," she said. "You have time to adjust and there are always new people coming into the plan at the higher price."
Having a surplus isn't ideal either for these savings funds, Lochner said, because its unclear what should be done with the extra money. Although risk is certainly there, no matter what, investors will get back at least what they put into the fund for education, she said.
"It’s like the stock market," she said. "In every single instance, everyone has gotten back at least what they put in. But it's also about what is the fair amount beyond that."